Technical Analysis – Embarrassing Nonsense

Technical analysis is nothing less than embarrassing nonsense practiced by fools or knaves.

Technical analysis (called charting by some) is supposed to give stock market predictions. It is practised by fools if they do not realise it is impossible to predict markets. If they know this but continue to sell their wares then they are fraudulent charlatans.

Let’s be charitable: most of them probably do not have a clue and simply enjoy making a living out of peddling their dreams.  If they are successful, it will be from seminars and book sales not successful financial forecasting for their own account.

There is nothing wrong with looking at a chart of the S&P 500 to see how big the last crash was or when it was. Nothing wrong with using its raw data to calculate past stock market profitability.

But anyone who uses it in an attempt to predict future profitability may as well use tea leaves or chicken entrails.  No chart will tell you when or if the market will go up or down. Any market. Any chart.

People who believe in charts no doubt also believe in an afterlife and the efficacy of homeopathy.  And pixies and bodily resurrection. And the parousia.

The concept is that markets move in patterns, in cycles. Well, yes, so does much if not all of the universe. But whereas we can use Newton’s laws to predict the elliptical progress of planets around the sun, there are no such laws which apply to complex dynamic systems.

Stock markets are an example of a chaotic system. The weather is another. Neither are predictable (if at all) very far into the future.

Many chartists produce subjective analysis: they see cups or pennants in the same way they see dragons or breasts in cloud formations. Others backtest their unfortunate ideas over past data and project their erroneous conclusions into the future.

Both sorts of analysis are equally useless. Save the money and effort and leave it all well alone.

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